Research on sources of company income

In April 2016, HMRC commissioned Ipsos MORI to conduct research into the characteristics of small companies, those with 0 to 4 employees, including details such as business composition, size and sector, company income, expenditure and assets, and particularly how they derive their income and work with clients. This research has just been published in January 2018.

Interestingly as extracting funds from a company and the salary/dividend option seems to continue to worry government, the conclusion notes that for most companies surveyed

‘the main drivers of retained earnings are business and personal factors – tax is reported as a relatively minor consideration. In theory, retaining money within a business rather than transferring it to a personal account, may have tax advantages. However, this was not widely raised as an explicit reason for retaining earnings either in the survey or the qualitative research.’

The research included a random probability telephone survey of 1,000 businesses and follow-up qualitative interviews with 30 businesses who had taken part in the survey.

Business size and composition

73% of businesses had one or two employees – 40% had one and 33% had two. A further 20% had three or four employees. Fewer than one in ten (8%) had no employees at all. Two in five of all businesses categorised themselves as one-person operations (41%) – indicating they were the sole person working in the business with no other directors or shareholders involved.

Other key facts which emerged were:

  • Turnover: 37% reported a turnover of up to £50,000 in the most recent year 22% had turnover of between £50,000 and £100,000 38% had turnover of more than £100,000
  • 88% contained a ‘business critical’ individual whose work was crucial to the continued existence of the business – generally the owner-director. Linked to this, most companies were dependent on a single employee for a large proportion of their income in the last 12 months – for three in five (58%) the highest contributing single employee was responsible for three-quarters or more of the company’s income.
  • 75% of companies made a profit in the last 12 months while 14% made a loss and 9% broke even
  • 84% retained at least some earnings in the last full accounting year. Two in five of these retained up to £10,000. Smaller business (in terms of both employee size and turnover) tended to retain a higher ratio of profits. Retained earnings were mainly used as financial security for the company, and as a source of finance for future investment or growth.
  • Among the companies surveyed, investment in fixed assets was very low. 32% had no fixed assets at all and 37% had low value fixed assets worth up to £10,000. The mean level of fixed assets, among companies who had them, was £77,000.
  • Salaries were the more common means of remuneration for employees while directors were more likely to be paid in dividends or a combination of dividends and salaries due to tax efficiency. Companies were heavily reliant on accountants for advice on these issues.
  • Around 20% had incorporated because they had to as a ‘client requirement’. The qualitative research also found that a key reason for becoming incorporated was limited liability, a finding supported by previous research. Accountant advice and/or tax efficiency were also prominent reasons.